The Impact of Earnings Announcements on Stock Returns of Cross-listed Stocks in the East African Security Exchanges
Abstract
The EMH theory has been built on the premise of the existence of an abundance of
information in the stock markets which is costless, and there is an immediate
absorption of this information into the security prices. Due to the critical role played
by earnings announcements, it is considered a significant component which is utilized
when testing the levels of efficiency of a security market. Stock markets in
developing countries provide investors with portfolio diversification benefits and
research on market efficiency in these developing markets is vital. If stock markets
are efficient, asset allocation remains the key factor which influences the overall risk
and return of an investor. The selection of securities is also irrelevant since there are
no undervalued or overvalued stocks. Despite the benefits associated with an efficient
market and financial liberalization, minimal studies which establish the level of
efficiency of the East African Security Exchanges as a whole exist. The objective of
the study, therefore, was to establish the impact of earning announcements on stock
returns of cross-listed stocks at the East African Security Exchanges. Several studies
which describe the correlation between earnings announcement and the stock returns
have been documented. The study used event study methodology to establish how the
East African Security markets react to earnings announcements over an event window
of twenty (21) days. The study was a census of all East African firms that have crosslisted
in the Security markets in East Africa. The study concludes that a strong form
of market efficiency does not exist at East African Security Exchanges. The Nairobi
Stock Exchange and Uganda Stock Exchange show a semi-strong level of market
efficiency while Rwanda Stock Exchange and Dar-es-Salaam Stock Exchange have
shown a weak form of market efficiency. This study adds to the prevailing literature
on the behavior of the East African stock markets with an aim of ascertaining the
efficiency of these markets
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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